At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." So you might think we'd be the last people to give virtual ink to such "news." And we would be -- if that were all we were doing.
But in "This Just In," we don't simply tell you what the analysts said. We'll also show you whether they know what they're talking about. To help, we've enlisted Motley Fool CAPS, our tool for rating stocks and analysts alike. With CAPS, we track the long-term performance of Wall Street's best and brightest -- and its worst and sorriest, too.
And speaking of the worst ...
On a banner day for the market yesterday, shareholders of solar powerhouses JA Solar (Nasdaq: JASO) and Canadian Solar (Nasdaq: CSIQ) were smiling even wider than most -- and for this, you can thank the friendly analysts at Auriga U.S.A. Surveying the solar power sector this week, the analyst pronounced these two stocks the undisputed "buys" of the year, with JA boasting an attractive valuation and leading cost structure, while Canadian Solar offers a story of improving cost models. But while these were two of Auriga's favorite stocks, they're not the only ones it likes.
Offering stock picks for all seasons, the analyst was generous enough to suggest a handful of other ideas for investors of various stripes. For the traders among you, Auriga suggests Renesola (NYSE: SOL), Jinko Solar, and Solarfun (Nasdaq: SOLF) as offering the greatest upside in the short term. Longer term, the analyst also likes Trina Solar (NYSE: TSL) and First Solar (Nasdaq: FSLR). Seems there's nearly nobody (save SunPower, the sole recipient of a downgrade in the sector) that Auriga doesn't like.
Let's go to the tape
And you know what? Maybe they're right. After all, Auriga has enjoyed some success making solar picks in the past. While not all of 'em work out as planned ...
|
Companies |
Auriga's Rating |
CAPS Rating |
Auriga's Picks Lagging S&P By: |
|---|---|---|---|
| Yingli Green | Outperform | **** | 24 points |
| First Solar | Outperform | ** | 13 points |
... a lot of them do ...
|
Companies |
Auriga's Rating |
CAPS Rating |
Auriga's Picks Beating S&P By: |
|---|---|---|---|
| JA Solar | Outperform | ***** | 60 points |
| Solarfun | Outperform | *** | 41 points (picked twice) |
| Suntech Power | Outperform | **** | 14 points |
... and on average, Auriga's batting about .454 in the Electrical Equipment sector, which is home to most solar stocks -- but beating the market by a combined 68 percentage points.
There's also no denying the (initial) attraction of the valuations in this sector. On the surface, at least, a lot of these stocks look startlingly cheap. Take Auriga's top two for example -- selling for 5.8- and 7.0-times forward earnings, respectively, JA and Canadian Solar both look unbelievably cheap.
Blinded by solar
Problem is, when something's as cheap as these stocks appear, that word "unbelievably" gains special significance. Sometimes, a stock's "cheap for a reason." But what's the reason for cheapness at JA and Canadian Solar?
Two possibilities suggest themselves. First, the fact that neither company reports its cashflow information in a timely fashion. Once a year is about as good as either gets, and according to the latest data available, neither JA nor Canadian Solar have precisely spotless records in the cashflow department. Of the two, JA looks best, generating positive free cash flow of about $76 million last year (a small step forward from the negative free cash flow of $476 million reported over the past five years combined). Canadian Solar is in even worse shape, with $303 million burned over the last five years, and $21 million burned last year alone. (Little wonder then that both companies currently carry more debt than cash on their balance sheets.)
The other worry concerns the companies' prospects going forward. About the same time Auriga was placing its bets on the companies, rival analyst Axiom Capital came out with a flash report warning investors that "Chinese Solar PV Module & Cell Prices [are] in Free-Fall." Citing a guidance update just out of LDK Solar (NYSE: LDK), Axiom warns that solar module prices at Suntech, Yingli, and Trina for example "are being quoted for immediate delivery at €1.20/watt, vs. €1.55/watt the first week in December" -- a 23% drop from month-ago prices, with "the bulk of the decline coming in the past 2 weeks."
What it means
What this means for JA Solar and Canadian Solar is, quite simply, compressed profit margins. The products they make are fetching significantly worse prices than they were just a weeks ago. Earnings growth, which most folks on Wall Street put in the mid-to-upper teens, may not materialize at all if prices keep falling like this. In which case, a single-digit P/E ... may be all the companies deserve.
